KEMAMPUAN AKHIR YANG DIHARAPKAN

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Working Capital

Manajemen Asset

FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS ESA UNGGUL

FEB 302

MANAJEMEN KEUANGAN

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KEMAMPUAN AKHIR YANG DIHARAPKAN

•

Memahami dan memiliki wawasan

•

Pengukuran kebutuhan modal kerja

•

Pengelolaan asset

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Chapter

13

Capital

Structure and

Dividends

Lawrence J. Gitman Jef Madura

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Describe the basic types of capital, external assessment of capital structure, the capital structure of non-United States frms, and the optimal capital structure.

Discuss the EBIT-EPS approach to capital structure.

Review the return and risk of alternative capital structures and their linkage to market value, and other important capital structure considerations.

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Explain cash dividend payment procedures,

dividend reinvestment plans, the residual theory of dividends,

and the key arguments with regard to dividend relevance or irrelevance.

Understand the key factors involved in formulating

a dividend policy and the three basic types of dividend policies.

Evaluate the key aspects of stock dividends, stock splits, and stock repurchases.

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The Firm’s Capital Structure

Current Assets

Fixed Assets

Current Liabilities

Long-Term Debt

Equity

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The Firm’s Capital Structure

• _{According to fnance theory, frms possess a}

target capital structure that will minimize their cost of capital.

• _{Unfortunately, theory can not yet provide}

fnancial managers with a specifc methodology to help

them determine what their frm’s optimal capital structure might be.

• _{Theoretically, however, a frm’s}_{optimal capital}

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The Firm’s Capital Structure

• _{The major beneft of debt fnancing is the tax}

shield provided by the federal government regarding

interest payments.

• _{The costs of debt fnancing result from:}

– _{The increased probability of bankruptcy caused}

by debt obligations.

– _{The agency costs resulting from lenders monitoring}

the frm’s actions.

– _{The costs associated with the frm’s managers having}

(9)

The Firm’s Capital Structure

•

Capital Structures of United States

and Non-United States Firms

– _{In general, non-United States companies}

have

much higher debt levels than United States companies primarily because United States capital markets

are relatively more developed.

– _{In addition, in most European countries}

and Japan, banks are more involved because they are permitted

(10)

The Firm’s Capital Structure

• _{Similarities between United States and foreign}

corporations include:

– Similarity of industry capital structure patterns.

– _{Similarity of large corporation capital structures.}

• _{In addition, it is expected that diferences in}

capital structures will further diminish as countries rely less

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• _{In general, it is believed that the market value}

of a company is maximized when the cost of capital

(the frm’s discount rate) is minimized.

• _{The value of the frm can be defned algebraically}

as follows:

The Optimal Capital

Structure

V = EBIT x_k (1 - t)

a

 _{It can be described graphically as shown}

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Table 13.1 (Panel 1)

Debt Ratios

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Debt Ratios

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EPS-EBIT Approach

to Capital Structure

• _The_{EPS-EBIT approach}_{to capital structure}

involves selecting the capital structure that maximizes EPS

over the expected range of EBIT.

• _{Using this approach, the emphasis is on}

maximizing

the owners’ returns (EPS).

• _{A major shortcoming of this approach is the fact}

that earnings are only one of the determinants of shareholder wealth maximization.

• _{This method does not explicitly consider the}

(17)

EPS-EBIT Approach

• _Example

– _{The capital structure of Buzz Company, a soft drink}

manufacturer is shown in the table below. Currently, Buzz Company uses only equity in its capital structure. Thus the current debt ratio is 0.00%. Assume Buzz

(18)

EPS-EBIT Approach

to Capital Structure

• _{EPS-EBIT coordinates for Buzz Company’s current}

capital structure can be found by assuming two EBIT values and calculating the associated EPS in the table below.

 _{This can be plotted on an EPS-EBIT plane shown}

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(20)

 _{We can use this information to calculate the EPS-EBIT coordinates}

as shown on the following slide.

EPS-EBIT Approach

• _{Buzz Company is considering altering its capital}

(21)

EPS-EBIT Approach

• _{This may be shown graphically as shown}

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Basic Shortcoming

of EPS-EBIT Analysis

• _{Although EPS maximization is generally good}

for the frm’s shareholders, the basic shortcoming

of this method is that it does not necessary

maximize shareholder wealth because it fails to consider risk.

• _{If shareholders did not require risk premiums}

(additional return) as the frm increased its use of debt, a strategy focusing on EPS maximization would work.

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Choosing the Optimal

Capital Structure

• _{The following discussion will attempt to create}

a framework for making capital budgeting decisions

that maximizes shareholder wealth (i.e., considers both risk and return).

• _{Perhaps the best way to demonstrate this}

is through the following example.

– _{Assume that Buzz Company is attempting to choose}

the best of several alternative capital structures—a specifcally, debt ratios of 0, 10, 20, 30, 40, 50,

(25)

Table 13.3

Choosing the Optimal

Capital Structure

• _{If we assume that all earnings are paid out as}

dividends, we can use the zero growth valuation model

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Figure 13.4

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Dividend Fundamentals

• _{Cash Dividend Payment Procedures}

– _A_dividend_{is a redistribution from earnings.}

– _{Most companies maintain a}_{dividend policy}_whereby

they pay

a regular dividend on a quarterly basis.

– _{Some companies pay an}_{extra dividend}_{to reward}

shareholders if they’ve had a particularly good year. Many companies pay dividends according to a preset

payout ratio, which measures the proportion of dividends to earnings.

– _{Many companies have paid regular dividends for over}

(30)

Dividend Fundamentals

– _{Dividend growth tends to lag behind earnings growth}

for most corporations (see example next slide).

– _{Since dividend policy is one of the factors that drives}

an investor’s decision to purchase a stock, most

companies announce their dividend policy and telegraph any expected changes in policy to the public.

– _{Therefore, it can be seen that many companies use their}

dividend policy to provide information not otherwise available

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Dividend Fundamentals

– Date of record: The date on which investors must own shares

in order to receive the dividend payment.

– ex dividend date: Four days prior to the date of record. The day on which a stock trades ex dividend (exclusive of dividends).

– _{In the fnancial press: Transactions in the stock on the}

ex dividend date are indicated by an “x” next to the volume

of transactions.

– _{In general, stock prices fall by an amount equal to the}

quarterly dividend on the ex dividend date.

– Distribution date: The day on which a dividend is paid (payment date) to stockholders. It is usually two or more weeks before stockholders who owned shares on the

date

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Cash Dividend Payment

Procedures

•

Example

– _{At the quarterly dividend meeting on}

June 10th,

the Jillian Company board of directors declared

an $.80 cash dividend for holders of

record on Monday, July 1st. The frm had 100,000 shares

of stock outstanding. The payment (distribution)

date was set at August 1st. Before the meeting,

the relevant accounts showed the following.

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Cash Dividend Payment

Procedures

• _{When the dividend was announced}

by the directors, $80,000 of the retained earnings ($.80/share x 100,000 shares) was transferred

to the dividends payable account. As a result, the key accounts changed as follows:

(35)

Cash Dividend Payment

Procedures

• _{Jillian Company’s stock began selling ex dividend}

on June 25th, 4 days prior to the date of record (July 1st). This date was found by subtracting 6 days (because

of the weekend) from July 1st.

• _{Stockholders of record on June 24th or earlier}

received the rights to the dividends, while those purchasing on June 25th or later did not.

Assuming a stable market, the price of the stock was expected to drop by $.80/share on June 25th. When the August 1st payment date arrived, the frm mailed payments to holders of record

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Cash $120,000 Dividends Payable $0 Retained Earnings $920,000

Cash Dividend Payment

Procedures

• _{Thus, the net efect of the dividend payment}

is a reduction of the frm’s assets (through a reduction

(37)

• _{Dividend reinvestment plans (DRIPS)}_{permit stockholders}

to reinvest their dividends to purchase additional shares rather

than to be paid out in cash.

• _With_{bank-directed}_{DRIPS, banks purchase additional shares}

on the open market in huge blocks which substantially reduces

per share commissions.

• _With_{company-directed}_{DRIPS, the company itself issues}

new shares in exchange for the cash dividend completely eliminating commissions.

• _With_{brokerage-directed}_{DRIPS, brokerage frms such as}

Charles Schwab will reinvest dividends for shareholders who hold stocks

in street name at no charge.

(38)

•

For Stockholders

– _{Substantial reduction in commission}

costs.

– _{They provide investors with an}

automatic savings mechanism.

•

For Companies

– _Goodwill

– _{Reduction in cost of delivering dividend}

checks.

– _{An inexpensive means of raising equity}

capital

for frms company-directed plans.

(39)

Dividend Policy Theory

•

The Residual Theory of Dividends

– _The_{residual theory of dividends}

suggests that dividend payments should be viewed as residual—a

the amount left over after all acceptable investment opportunities have been

undertaken.

– _{Using this approach, the frm would treat}

the dividend decision in three steps as shown

(40)

Step 2

Using the optimal capital structure proportions, estimate the total amount

of equity fnancing needed to support the expenditures estimated in Step 1.

Step 3

Because the cost of retained earnings is less than new equity, use retained earnings to meet the equity requirement in Step 2. If

inadequate, sell new stock. If there is an excess of retained earnings, distribute the surplus amount—athe residual—aas dividends.

Step 1

Determine the optimal level of capital expenditures which is given by the point of intersection of the investment opportunities

schedule (IOS) and weighted marginal cost of capital schedule (WMCC).

(41)

Dividend Policy Theory

•

The Residual Theory of Dividends

– _{In sum, this theory suggests that no}

cash dividend

is paid as long as the frm’s equity need is in excess of the amount of retained earnings.

– _{Furthermore, it suggests that the}

required return demanded by

stockholders is not infuenced by the

frm’s dividend policy—aa premise that in turn suggests that dividend policy is

(42)

Dividend Policy Theory

•

Dividend Irrelevance Arguments

– _{Merton Miller and Franco Modigliani}

(MM) developed a theory that shows that in perfect fnancial markets

(certainty, no taxes, no transactions costs or other market imperfections), the value of a frm is unafected by the distribution of dividends.

– _{They argue that value is driven only by}

the future earnings and risk of its investments.

– _{Retaining earnings or paying them in}

(43)

Dividend Policy Theory

•

– _{Some studies suggested that large}

dividend changes afect stock price behavior.

– _{MM argued, however, that these efects}

are the result of the information

conveyed by these dividend changes, not to the dividend itself.

– _{Furthermore, MM argue for the existence}

of a “clientele efect.”

– _{Investors preferring dividends will}

purchase high dividend stocks, while those preferring capital gains will

(44)

Dividend Policy Theory

•

– _{In summary, MM and other dividend}

irrelevance proponents argue that—aall else being equal—a

an investor’s required return, and therefore the value of the frm, is

unafected by dividend policy because:

• _{The frm’s value is determined solely by the}

earning power and risk of its assets.

• _{If dividends do afect value, they do so}

because

of the information content, which signals management’s future expectations.

• _{A clientele efect exists that causes}

(45)

Dividend Policy Theory

•

Dividend Relevance Arguments

– Contrary to dividend irrelevance proponents, Gordon and Lintner

suggested stockholders prefer current dividends and that a positive

relationship exists between dividends and market value.

– Fundamental to this theory is the “bird-in-the-hand” argument which suggests that investors are generally risk-averse and attach less risk to current as

opposed to future dividends or capital gains.

– Because current dividends are less risky, investors will lower their required return —athus boosting

(46)

Factors that Afect

Dividend Policy

•

Legal Constraints

– Most state securities regulations prevent frms

from paying out dividends from any portion

of the company’s “legal capital” which is measured

by the par value of common stock—aor par value

plus paid-in-capital.

– Dividends are also sometimes limited to the sum of the frm’s most recent and past retained earnings—a although

payments in excess of current earnings is usually permitted.

– Most states also prohibit dividends when frms have overdue liabilities or are

(47)

Factors that Afect

Dividend Policy

•

Legal Constraints

– Even the IRS has ruled in the area of dividend policy.

– Specifcally, the IRS prohibits frms from acquiring earnings to reduce

stockholders’ taxes.

– The IRS can determine that a frm has accumulated an excess of earnings to allow owners to delay paying ordinary

income taxes (on dividends), it may levy

an excess earnings accumulation tax on any retained earnings above $250,000.

– It should be noted, however, that this ruling

(48)

Factors that Afect

Dividend Policy

•

Contractual Constraints

– _{In many cases, companies are}

constrained in the extent to which they can pay dividends by restrictive

provisions in loan agreements and bond indentures.

– _{Generally, these constraints prohibit the}

payment

of cash dividends until a certain level of earnings

are achieved or to a certain dollar amount or percentage of earnings.

– _{Any violation of these constraints}

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Factors that Afect

Dividend Policy

•

Internal Constraints

– _{A company’s ability to pay dividends is}

usually constrained by the amount of available cash rather than the level of retained earnings against which

to charge them.

– _{Although it is possible to borrow to pay}

(50)

Factors that Afect

Dividend Policy

•

Growth Prospects

– _{Newer, rapidly-growing frms generally}

pay little

or no dividends.

– _{Because these frms are growing so}

quickly,

they must use most of their internally generated funds to support operations or fnance expansion.

– _{On the other hand, large, mature frms}

generally

pay cash dividends since they have access

to adequate capital and may have limited

(51)

Factors that Afect

Dividend Policy

•

Owner Considerations

– _{As mentioned earlier, empirical}

evidence supports

the notion that investors tend to belong to “clienteles”—a where some prefer high dividends, while others prefer capital

gains.

– _{They tend to sort themselves in this way}

for a variety of reasons, including:

• _{Tax status}

• _{Investment opportunities}

(52)

Factors that Afect

Dividend Policy

•

Market Considerations

– _{Perhaps the most important aspect of}

dividend policy is that the frm maintain a level of predictability.

– _{Stockholders that prefer dividend-paying}

stocks prefer a continuous stream of fxed or increasing dividends.

– _{Shareholders also view the frm’s}

dividend payment as a “signal” of the frm’s future prospects.

– _{Fixed or increasing dividends are often}

considered

(53)

Types of Dividend Policies

•

Constant-Payout-Ratio Policy

– _{With a}_{constant-payout-ratio}_dividend

policy,

the frm establishes that a specifc percentage

of earnings is paid to shareholders each period.

– _{A major shortcoming of this approach is}

that

if the frm’s earnings drop or are volatile, so too

will the dividend payments.

– _{As mentioned earlier, investors view}

volatile

dividends as negative and risky—awhich can lead

(54)

Types of Dividend Policies

•

Regular Dividend Policy

– _A_{regular dividend policy}_{is based on the}

payment

of a fxed-dollar dividend each period.

– _{It provides stockholders with positive}

information indicating that the frm is doing well and it minimizes uncertainty.

– _{Generally, frms using this policy will}

increase

the regular dividend once earnings are proven

(55)

Types of Dividend Policies

•

Low-Regular-and-Extra Dividend

Policy

– _{Using this policy, frms pay a low regular}

dividend, supplemented by additional dividends when earnings can support it.

– _{When earnings are higher than normal,}

the frm will pay this additional dividend, often called an extra dividend, without the obligation to maintain it during

subsequent periods.

– _{This type of policy is often used by frms}

whose

sales and earnings are susceptible to swings

(56)

Other Forms of Dividends

•

Stock Dividends

– _A_{stock dividend}_{is paid in stock rather}

than in cash.

– _{Many investors believe that stock}

dividends increase the value of their holdings.

– _{In fact, from a market value standpoint,}

stock dividends function much like stock splits. The investor ends up owning

more shares, but the value of their shares is less.

– _{From a book value standpoint, funds are}

(57)

The current stockholder’s equity on the balance sheet

of Trimline Corporation, a distributor of prefabricated cabinets, is shown in the following accounts.

Other Forms of Dividends

(58)

Other Forms of Dividends

•

Stock Dividends

– _{If Trimline declares a 10% stock dividend}

and the current market price of the stock is $15/share, $150,000 of retained

earnings

(10% x 100,000 shares x $15/share) will

be capitalized.

– _{The $150,000 will be distributed between}

the common stock (par) account and paid-in-capital

in excess of par account based on the par value

of the common stock. The resulting balances

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Other Forms of Dividends

•

Stock Dividends

Because 10,000 new shares (10% x 100,000) have been issued

at the current price of $15/share, $150,000 ($15/share x

(60)

•

Stock Dividends

A total of $40,000 ($4 par x 10,000 shares) is added to

common stock. The remaining $110,000 [($15 - $4) x

10,000 shares]

(61)

•

Stock Dividends

– _{From a shareholder’s perspective, stock}

dividends result in a dilution of shares owned.

– _{For example, assume a stockholder}

owned 100 shares at $20/share ($2,000 total) before a stock dividend.

– _{If the frm declares a 10% stock dividend,}

the shareholder will have 110 shares of stock. However, the total value of her shares will still be $2,000.

– _{Therefore, the value of her share must}

have fallen

(62)

Other Forms of Dividends

•

Disadvantages of stock dividends

include:

– _{The cost of issuing the new shares.}

– _{Taxes and listing fees on the new shares.} – _{Other recording costs.}

•

Advantages of stock dividends

include:

– _{The company conserves needed cash.}

– _{Signaling efect to the shareholders that}

the frm

(63)

Other Forms of Dividends

•

Stock Split

– _A_{stock split}_{is a recapitalization that}

afects the number of shares outstanding, par value, earnings

per share, and market price.

– _{The rationale for a stock split is that it}

lowers the price of the stock and makes it more attractive to individual investors.

– _{For example, assume a share of stock is}

currently selling for $135 and splits 3 for 2.

– _{The new share price will be equal to 2/3}x

(64)

Other Forms of Dividends

•

Stock Split

– _{Continuing with the example, assume}

that the investor held 100 shares before the split with a total value

of $13,500.

– _{After the split, the shareholder will hold:}

(65)

•

Stock Split

– _A_{reverse stock split}_{reduces the}

number of shares outstanding and raises stock price—athe opposite

of a stock split.

– _{The rationale for a reverse stock split is}

to add respectability to the stock and convey the meaning that it isn’t a junk stock.

Research on both stock splits and stock

dividends generally supports the theory that they do not afect the value of shares.

They are often used, however, to send a signal

(66)

Other Forms of Dividends

• _{Not only do stock splits leave the market value of}

shareholders unafected, but they also have little afect from an accounting standpoint as this 2-for-1 split

(67)

•

Stock Repurchases

– _{Stock repurchase}_{: The purchasing and} retiring

of stock by the issuing corporation.

– _{A repurchase is a partial liquidation}

since it decreases the number of shares outstanding.

– _{It may also be thought of as an}

alternative

(68)

Other Forms of Dividends

•

Alternative Reasons for Stock

Repurchases

– _{To use the shares for another purpose} – _{To alter the frm’s capital structure}

– _{To increase EPS and ROE resulting in a}

higher market price

– _{To reduce the chance of a hostile}

(69)

Chapter

13

End of Chapter

Lawrence J. Gitman Jef Madura

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SEKIAN

DAN

TERIMA KASIH